Lekker! A carbon tax in South Africa without the politics

South Africa’s path to a carbon tax has been smoother than Australia’s. The Climate Institute’s Erwin Jackson chats with South African energy expert Harald Winkler to find out more.

Debate on climate change and carbon pricing in Australia has focused on what other wealthy nations are doing — but don’t forget South Africa. The developing country, which has per capita income (and per capita greenhouse gas emissions) about one-third of Australia’s, is due to start its economy-wide carbon tax in July.

Harald Winkler from Cape Town University’s Energy Research Centre (Winkler is a contributor to South Africa’s climate plan) explains the scheme …

What has taken South Africa to the point of introducing a carbon tax?

International discussions around the role of developing nations in addressing climate change were key. In 2006, the South African cabinet mandated work on the Long-Term Mitigation Scenarios (LTMS), which asked “what if South Africa had to take on international commitments (on emissions)?” and brought together government, business and NGOs to build evidence to answer this question. Many options to reduce emissions where discussed, but a carbon tax was central.

This process highlighted that the economic impact of the carbon tax on GDP would be minor if revenues were recycled appropriately. Impacts of energy price rises on the poor could be offset by returning carbon tax revenues to them.

Treasury built on the LTMS’s interest in a carbon tax. Also, there is a dawning realisation in South Africa that collective global action is important to us, as we are very vulnerable to the impacts of climate change. There is an appreciation that our actions on climate change are not a burden, but are fundamentally in South Africa’s own national interest. If we don’t act, we will struggle to convince others like Australia and the US to do so.

When does the carbon tax start, and how much will it be?

Finance Minister Pravin Gordhan announced a carbon tax would be implemented next financial year (2013-2014). A budget review said a “carbon tax will contribute to the global response to mitigate climate change”. The plan is to implement the tax at a fairly low level, and then define an increasing price path over time. It is a cautious approach, typical of Treasuries. But this is finally an announcement that a carbon tax will be implemented, which is a major step for a developing country.

The effective level of the tax is not entirely clear, with detailed design still under discussion. However, the headline number is RAND 120 a tonne of carbon dioxide equivalent, which equates to $A14. Another way to think about this is that in “international dollars” (which factor in purchasing parity, based on estimates from the World Bank), the price is about PPP$24 a tonne.

There are also thresholds that exempt some energy-intensive and trade-exposed sectors, and this will decrease the effective tax rate. Then again, the carbon tax increases by 10% per year, from 2013-2019, and exemptions will cease from 2020.

“… the carbon tax has not been a major political issue in South Africa.”

Australia’s carbon price has various exemptions for emission intensive trade exposed industries (in some cases the effective exception rate is more than 100%). What approach has South Africa taken, and what products and services does the carbon tax cover?

Details are still emerging. The carbon tax has been framed as economy-wide and covers all sectors, but with declining exemptions that effectively lower the rate for several industries. Indicatively, in the first year of the tax, the electricity sector is exempt for 60% of the cost and this exception declines at 10% per year. This is basically the same for other sectors like oil refining, iron and steel, aluminium, agriculture, and coal mining (the exemptions are to cease from 2020).

What other policies is South Africa implementing on climate change and renewable energy?

In advance of the 2011 UN climate summit in Durban, South Africa, the cabinet signed off on the formal climate policy (or white paper). This includes references to the carbon tax, but also sets the national emission targets, sets out that sector carbon targets (or budgets) need to be defined, and starts to put in place the measures needed to measure, report and verify emissions.

The electricity sector in South Africa accounts for nearly half of the country’s emissions. The draft 2010-2030 Integrated Resource Plan (IRP) for the electricity sector differs from previous IRPs in moving from least-cost as the only criterion to one where carbon reductions are a central element. This is highly significant, and the IRP sees substantial amounts of renewable and nuclear capacity being included in South Africa’s previously coal-dominated energy mix.

South Africa is investing heavily in renewable energy. This is seeing a huge scale-up from tens of megawatts (MW) to the government procuring 3725MW of renewable energy in five different rounds. The second round is under way now.

What kind of emissions reductions is South Africa expecting from its carbon laws?

South Africa’s commitment to act, formally submitted to the UN Framework Convention on Climate Change, is to reduce its emissions by 34% below business-as-usual levels by 2020, and by 42% by 2025. This will enable emissions to “peak, plateau and decline”. (I should point out that South Africa will genuinely need financial assistance to achieve this.)

Personally, I think this is highly significant. As an energy researcher, I know that it will be challenging for South Africa to turn around an economy based on coal and minerals. Whether it is enough to encourage others to act and restrain global temperature rises to two degrees Celsius (the UN’s goal) is another matter.

What has been the nature of political support and opposition to South Africa’s carbon price?

The African National Congress has a significant majority in government, and the carbon tax has not been a major political issue in South Africa. There has been the usual debate between NGOs (for) and parts of industry (against) the carbon tax, but one should note that the more foresighted industrial leaders support the proposal, and engage on issues like design of the tax (including recycling of revenues) not outright opposition.

Does that mean South Africa now rates higher on the investment sovereign risk scale than Australia? I feel so sorry for those mining companies. They won’t know where to turn to next. Maybe now they’ll just chance their sovereign risk luck in good ol’ Aussie.